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• Is your PAYE code correct?
• Your remuneration package
• Cheap or interest free loans
• Expense payments
• Travel and subsidence
• Pensions
• Profit related pay
• Company cars

Is your PAYE code correct

Many people can go for years paying too much (or, perhaps more worryingly, too little) tax.

PAYE aims to see that over the course of a tax year, approximately the right amount of tax is deducted from your earnings. This is done by the issue of one, or sometimes a series of tax codes, which are used by your employer to calculate the tax to be deducted from your earnings.

Unfortunately, many employees have incorrect tax codes. In particular, they may not have notified the tax office of changes in their circumstances that would affect their tax position, such as changing jobs and losing the benefit of a company car, or they may have started investing in a personal pension plan.

It is important that we check your PAYE code now, because it is much easier to rectify mistakes before the tax year ends.

Your remuneration package

An attractive remuneration package can include any of the following:

• salary
• reimbursement of expenses
• more generous expenses - business travel in first or business class, or a better quality hotel on business trips
• bonus schemes and profit related pay
• share incentive arrangements
• pension provisions
• child care
• life assurance and/or health care
• choice of a company car or additional salary and reimbursement of car expenses for business travel in your own car
• mobile phone
• use of a computer at home and contributions to the additional costs of working at home
• other benefits in kind including, for example, an annual function costing not more than £150 per head, or long service awards

Of course, negotiating the appropriate package is a matter for you and your employer, but you should seek our advice to ensure that your overall package is as tax and NI efficient as possible.

Cheap or interest-free loans

Where loans from an employer total more than £5,000, tax is chargeable on the difference between any interest actually paid and interest calculated at the official rate.

Expense payments

Your employer is required to report expenses payments to the Inland Revenue on form P11D each year. To avoid paying tax on these payments you have to claim a deduction on your Tax Return - your employer provides you with a copy of your P11D for 2003/04 tax year no later than the 6 July following the end of the tax year.

This cumbersome process of reporting and claiming may be avoided if your employer has been granted a dispensation.

We can help employers complete forms P11D - and cut compliance costs by applying for dispensations

You may be able to claim tax relief for other expenses you incur in connection with your job, but the rules are fairly restrictive.

Travel and subsistence

Site-based employees are able to claim a deduction for travel to and from the site at which they are working, plus subsistence costs when they stay at or near the site

Employees working away from their normal place of work can claim a deduction for the cost of travel to and from their temporary place of work. The maximum period for which a place of work can be regarded as 'temporary' is currently 24 months.

Pensions

Employer contributions to your pension scheme or your own personal pension policies are not liable for tax or NICs. You should be aware that while your employer can contribute to your personal pension scheme, these contributions are added to your own for the purpose of capping.

Profit related pay

Although there are no tax breaks, profit related pay is an incentive to many to work harder and enjoy some of the benefits of the employer's increase in profits.

There can also be an NI saving for employees (not directors) if performance related pay is not included in the weekly or monthly pay, but instead paid as a bonus.

Consult us about this, and other NI reduction ideas.

Company cars

The company car is an important part of the remuneration package for many employees despite the increases in the taxable benefit rates, both current and announced. There are factors beyond tax cost which mean a company car remains attractive to many - peace of mind over the financial aspects of car ownership, for example.

Tax is charged on the provision of the car and on fuel by employers for private mileage. Employers pay Class 1A NICs at 12.8% on the same amount. (Payable by the 19 July following the end of the tax year.) The amount on which tax and Class 1A NICs is paid in respect of a company car depends on a number of factors. Essentially, the amount charged is calculated by multiplying the list price of the car, including most accessories, by a percentage. The percentage is set by reference to the rate at which the car emits carbon dioxide:

You can find your taxable percentage of the list price for 2004/05 using the following table:

The 15% rate for petrol and 18% rate for diesels will apply for cars with CO₂ emissions of less than 145 g/km for 2005/06 and 2006/07.

Discounts apply for 'greener' cars. Ask us for details of your options.

Tax payable

These standard charges are subject to income tax at basic or higher rate (depending on the employee's rate of pay). The tax is usually collected under the PAYE system by appropriate adjustment of the employee's tax code.

For the benefit to be attractive, the employee must pay less in extra tax than it would cost him to run his own car out of his taxed income. These are examples of the 2004-05 tax costs to an employee of a company car:

Private mileage

The taxable benefit is calculated by multiplying a nominal figure £14,400, by the same CO₂ emissions based percentage.

You can avoid the car fuel charge by either paying for all fuel yourself and claiming the cost of fuel for business journeys at the Inland Revenue advisory rates, or by reimbursing your employer for fuel used privately, using the same rates.

Many people now question the wisdom of having a company car, and consider instead running their own car and claiming reimbursement from their employer for business travel at the Inland Revenue approved mileage rates. We can help you review your options, the costs and the benefits, so that you can make an informed decision.

Example

Peter is an owner-director. For his company car he had chosen one which, on the date before it was first registered, had a list price of £18,000. The car runs on petrol, and emits CO₂ at a rate of 182 g/km.

Peter's company is successful and he pays tax at 40%. His 2004/05 tax bill on the car is therefore:
£18,000 x 22% x 40% = £1,584.00

Peter's company will pay Class 1A NICs of:
£18,000 x 22% x 12.8% = £506.88

The company also pays for all of Peter's petrol. Because Peter does not reimburse the cost of fuel for private journeys, he will pay tax of:
£14,400 x 22% x 40% = £1,267.20

and the company will pay Class 1A NICs of:
£14,400 x 22% x 12.8% = £405.50

The total tax and NI costs are therefore over £3,760. Furthermore, although the company is paying for the fuel, the company will also need to pay a gross amount of over £4,830 to provide Peter with the funds to pay the tax. When employers' national insurance is taken into account, the gross cost of funding Peter's tax and the NI liabilities will be nearly £6,400.

How we can help

The tax cost of company cars has risen significantly over the last few years, and we can help you review your company car policy and discuss where savings can be achieved.

Meanwhile, consider that until 2007 the maximum tax payable by an employee or director on a company 'van' is only £200, and there is no charge for fuel provided. The rules are due to change from 6 April 2007 - at current rates the maximum tax will rise to £1,200, plus up to £200 for fuel.

Many people have seen significant savings for both employer and employee in replacing company cars with employee-owned cars part-funded by mileage allowances at the Inland Revenue rates - where a company vehicle is still appropriate, a 'van' rather than a car is worth considering.

Talk to us - you might be pleasantly surprised by some of the vehicles that qualify as 'vans' - and there are many other aspects of employee taxation where we can advise.

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